ANALYSIS

Steep path to raise big revenues by cutting loopholes

WASHINGTON » Whether to raise revenue through increasing tax rates or cutting loopholes has become a central sticking point in the negotiations on a major debt deal.

The White House has drawn one line in the sand: It argues that tax rates must go up on income above $250,000 a year, as reducing tax breaks for the affluent cannot on its own raise the $1.6 trillion in additional revenue it seeks. Congressional Republicans have drawn another line: They might accept higher revenue, but only through the reduction of tax breaks.

But is it even possible to raise $1.6 trillion from wealthy households without changing tax rates? Experts say it is. But doing so might be politically infeasible and hugely unpopular, as it would involve wiping out nearly every deduction, credit and preferential rate those affluent households claim.

"Getting $1.6 trillion on the individual side, only through rolling back tax expenditures?" said Donald Marron, the director of the Tax Policy Center, a Washington-based research group. "It's a heavy lift."

Wiping out all tax expenditures — the official name for the deductions, credits and other loopholes addling the tax code — for the top 2 percent of earners would raise about $2 trillion over 10 years. (Tax expenditures for all households cost the government about $1 trillion a year, as middle-class and low-income families also benefit.)

But doing so would mean that a family earning just more than $250,000 a year might face a sharply higher tax bill than a household earning just less than that amount. A phase-in, which most analysts consider unavoidable, might slash $300 billion from the revenue pot, leaving roughly $1.7 trillion, just more than the White House seeks.

That means that any proposal raising $1.6 trillion would involve getting rid of nearly every loophole or break in the code for high-income families — not just itemized deductions but also preferential rates on investment income and every tax credit the wealthy can currently claim.

There would be no or close to no deduction for charitable giving, raising the ire of wealthy donors and nonprofit directors. The home mortgage interest deduction would vanish, hurting the housing market just as it has started to turn around. Preferential tax treatment of capital gains and dividends would disappear, probably throwing the markets into a sell-off. The top 1 percent of earners might see their after-tax income fall by as much as 19.8 percent, according to calculations by the Tax Policy Center.

This is a large part of the reason that the White House has argued for allowing the top two marginal rates to rise to the Clinton-era levels, with a top rate of 39.6 percent. Such an increase would reduce the deficit by nearly $1 trillion over 10 years and allow for a deal that caps deductions, rather than eliminates all of them.

Although the politics remain difficult, tax experts say they can identify a number of plausible routes to agreement between Republicans and Democrats.

For one, the White House could agree to a lower revenue target — say, $1 trillion over 10 years, or $1.2 trillion — allowing for a more moderate package of tax increases on the wealthy.

Second, tax rates could rise for the top two brackets — not to their Clinton-era rates but to a few percentage points below them. A top rate might climb to 37 percent, rather than 39.6 percent, from the current 35 percent. That would still increase revenue by hundreds of billions of dollars over the course of 10 years, making the rest of the tax math easier.

Republicans and Democrats might also agree to a broad cap on all deductions for a household, an option that negotiators on the Hill said holds promise for both sides. For one, limiting deductions would avoid the thorny negotiations on which tax expenditures to eliminate.

With some higher rates and limits to loopholes, experts say many different plans could raise an additional $1 trillion to $1.6 trillion in revenue over 10 years.

The centrist research group Third Way ran the numbers on a White House proposal to let the Bush-era tax cuts on the top two rates expire, for example. Third Way also imagined increasing the estate tax, limiting the value of itemized deductions and carrying out the "Buffett Rule," which ensures that households earning more than $1 million a year pay at least 30 percent of their income in taxes. That package of changes increased revenue by about $1.6 trillion over 10 years.

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manakukewrote:

Not so simple Donkeys.

on November 21,2012 | 04:07AM

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AhiPokewrote:

Warren Buffet doesn't pay a lower percentage tax rate than his secretary because of lower rates. It's because his accountant/lawyers find deductions and loopholes. Increasing the tax rates, as Obama suggests, will probably not increase Mr. Buffets' taxes. It'll catch those individuals who make a good income but don't have a high priced accountant/lawyer to find loopholes.

on November 21,2012 | 11:26AM

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shee26wrote:

In this day and age, why do we have to keep sending our representatives to Washington anyways? It costs millions of dollars to do that... Let them all telecommute and save taxpayer dollars. Time for them to live in the communities that they represent and really see what is happening and. I also don't see any of them willingly cut their own pay to help reduce the deficit or take coach class to fly back and forth to Washington. Our Washington delegation is so out of touch with the people of Hawaii. We the working public will always be screwed by their decisions supposedly on our behalf.

on November 21,2012 | 09:22PM

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sumoroachwrote:

If you raise the taxes raise them all. Also cut all tax loopholes. Start over too many loophaole for everyone. Everyone should have skin in the game. People who pay little or no taxes get bigger returns. Look at the ilegal's they claim all these kids, some up to 20 who live in the home countries.

on November 22,2012 | 07:11AM

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Thaiwrote:

Mrs. Lowery shame shame. "The centrist research group Third Way" Using that logic then Rush Limbaugh must also be centrist. Third Way also "imagined" increasing the estate tax (death tax). Imagined? Sounds so benign doesn't it. Typical know it all progressive. Raise taxes to support an ever growing central government. Make it look like only the wealthy will take a hit using the class envy card and all will be well with the world. I got an idea. How about trimming some of the entitlements the are siphoning trillions from the private sector. "Let the people keep more of what they earn" to paraphrase G. W. Bush